Financier Guy Hands dramatically abandoned his £1.5bn lawsuit against Citigroup on Friday, nine years after the ill-fated £4.2bn takeover of music group EMI that sparked a long-running legal battle with the American bank.

At a special court hearing on Friday, lawyers for the financier’s private equity fund, Terra Firma, told a London court the action had been withdrawn, just four days into a case that had been expected to last until mid-July.

“Terra Firma confirms it unreservedly withdraws its allegations of fraud,” David Wolfson – standing in for lead QC Anthony Grabiner – told the hastily convened court. Terra Firma will also pay the costs of the US bank, likely to run into millions of pounds.

Hands, who had been claiming at least £1.5bn from Citi, had been questioned by the bank’s lawyer for the previous two days, and his evidence had been expected to last into next week. He had faced repeated questions about his recollection of events in 2007 when Terra Firma took over EMI just before the credit crunch and had been accused of having a “hazy memory”.

At one stage during his questioning of Hands, Mark Howard QC, representing Citi, said: “The problem is, Mr Hands, your story is shifting and it is impossible to reconcile these different versions.”

Citi was an adviser to EMI – at the time the label of Kylie Minogue, Coldplay and the Beatles – and lent Terra Firma £2.5bn to fund the deal in which Hands admitted he had personally lost €200m (£156m). One of the claimant’s arguments was that Citi banker David Wormsley had told Hands there was a rival bid for EMI and the price at which to table the offer.

The case had focused on alleged “fraudulent misrepresentations” made during 2007 by Wormsley, then the head of UK banking at Citi; Michael Klein, who was head of global banking; and Chad Leat, co-head of global credit markets.

Mr Justice Burton, the judge who had been presiding over the case, said: “I’m sure this is the right result.”

Outside court, Citi said: “We have always maintained that the allegations made by Terra Firma were entirely baseless and that Citi, specifically David Wormsley, Michael Klein and Chad Leat, acted at all times with absolute honesty and professional integrity throughout the EMI transaction. We are very pleased that Terra Firma has unreservedly withdrawn the allegations, agreed to the dismissal of the proceedings and will pay Citi’s costs in relation to this matter.”

It was the second time Citi had faced Terra Firma in court. A New York jury had rejected a claim against Citi in 2010 – where the relationship between Hands and Wormsley had been subjected to close scrutiny – but an appeal allowed the case to be transferred to the UK in 2013.

Hands, who was not in court, said the latest claim had been brought in good faith. “However, it has become evident that our documentation of the fast-moving and complex events, and memories of these events after nine years, are no longer sufficient to meet the high demands of proof required for a fraud claim in court,” he said.

“The matter is now closed,” said Hands, saying that the Terra Firma business he founded in 2003 was looking to the future. “We have an exciting portfolio of companies, a talented and experienced team, supportive and loyal investors and €1bn of capital to invest,” he said.

The case had begun to scrutinise the goings-on in the City in the run-up to the credit crunch and how negotiations for deals took place. If the case had continued, Wormsley, Klein and Leat had been expected to give evidence.

The court had heard that at one stage allegations – since removed – had been made by Hands against Chuck Prince, former chief executive of Citi, to embarrass Citi and force the bank to settle. “That’s not correct,” Hands had said.